Why the euro/dollar exchange rate should be left alone

Tampering with exchange rates to stem the rise of the euro against the dollar would be wrong, according to a March commentary from EuroIntelligence, which argues that leaving the euro/dollar exchange rate alone would be more beneficial to both currencies.

With the euro running a current account surplus and the US deeply in the red, it is the euro that can handle small currency fluctuations, the analysis says. Additionally, with the strong euro acting as a buffer against rising inflation, the ECB has managed to keep interest rates at a steady 3% since last June, it observes.

According to EuroIntelligence, any talk of a co-ordinated effort to cut the rising euro should be played down, as the US would not partake in a joint venture. Furthermore, a weak dollar is the best tool to end the looming US recession, the analysis argues.

This weakness should play into Europe’s hands because the dollar’s leading position as the main reserve currency is under pressure, which should in turn strengthen the euro’s international status, argues EuroIntelligence.

The analysis concludes that a strong euro is an effective means of discouraging European governments from pursuing competitive trade surplus policies with the rest of the world. It will also allow euro-zone countries to introduce alternative economic reforms which will give them more flexibility in the service sector, it argues.